NEW YORK: The rapid rise of the US dollar since the start of the year is a double-edged sword for American multinational companies, pushing some of them to decide whether to hedge or reposition their activities abroad to avoid fallout.
For an importer, the surge in the greenback against the euro, yen or British pound is a plus, because it makes the products they buy cheaper.
But for a US export company, products sold in dollars have become more expensive, which increases the risk of losing clients and seeing sales decline. And they also lose money when converting foreign revenue back into dollars.
Many firms already revised their earnings forecasts for the year to account for the changing exchange rate, including computing giant Microsoft, which warned its quarterly sales will fall by US$460 million and its net profit by US$250 million due to the currency hit.
Adobe, Salesforce, Biogen and Pfizer have all warned that the dollar’s rapid rise will have a greater impact on their accounts than expected.
US$40 BILLION HIT
Companies that generate most of their revenue outside of the United States are the most exposed, starting with tech giants, medical equipment makers and service companies, according to Kyriba, a corporate cash management platform.
Kyriba estimates the currency effects could mean a US$40 billion hit to earnings of S&P 500 firms in the first half of the year.
The Federal Reserve’s decision to aggressively hike interest rates to combat rampant inflation, combined with an influx of funds into the country from investors looking for a safe haven in uncertain times, have combined to boost the US dollar.
The greenback has risen 13 per cent compared to the euro over the last 12 months, approaching parity, and gained 22 per cent against the yen.
“Short term, that’s a good thing for the United States because it means all the imports are cheaper and it puts downward pressure on inflation,” said Desmond Lachman of the American Enterprise Institute think tank.
But further out, the effect on the US economy is more nuanced, because if exports fall, “the United States trade deficit widens and then we get more external debt”.
But multinationals “don’t have control over these big items”, he explained.
They can, however, mitigate the effect of fluctuations in foreign currencies in which they price and invoice goods by adopting hedging strategies – using financial instruments that provide a kind of insurance against losses caused by the changing exchange rate.
Most corporations already have hedging programs in place, and they change their plans on a quarterly or even monthly basis, sometimes trying to predict currency movements, Kyriba’s Bob Stark said.
But it’s not an exact science, he noted, especially in a time of great uncertainty about the direction of inflation, interest rates and the possibility of a recession.
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